January 13, 2017
An NYT article on Robert Lighthizer, Donald Trump’s pick to be trade representative, left out some important background information. It notes that Lighthizer wants to reduce the size of the U.S. trade deficit with China. It then told readers that this could lead to major conflicts with China:
“Exports are important for China. It consistently sells $4 worth of goods to the United States for each $1 of imports. That mismatch has produced a bilateral trade surplus for China equal to about 3 percent of the country’s entire economy, creating tens of millions of jobs.
“The benefits to China from that surplus have been increasing rapidly in the past few years.”
It is worth noting that China has actually sharply reduced its trade surplus in prior years. According to the I.M.F. it peaked at 9.9 percent of GDP in 2007. It then declined sharply to just 1.8 percent of GDP in 2011. It has since edged slightly higher, but it is still less than 3.0 percent of GDP.
Ordinarily, we would expect that a fast growing developing country like China would be running a trade deficit, as capital flows into the country to take advantage of higher returns. This has not happened in China’s case as the government has offset inflows of private capital by buying up trillions of dollars of foreign assets. It now holds more than $3 trillion in reserves in addition to another $1.5 trillion in foreign assets in the form of sovereign wealth funds.
Reportedly China has recently been trying to raise the value of its currency. This would suggest an obvious path of agreement between the U.S. and China under which the two countries could act jointly to raise the value of China’s currency against the dollar, thereby putting downward pressure on the trade deficit.
The piece also notes Lighthizer’s advocacy of the efforts of the Reagan administration to pressure Japanese manufacturers to “voluntarily” limit their exports to the United States. It would have been worth mentioning that these restrictions on exports led the Japanese manufacturers to begin to set up factories in the United States. Today, most of the cars that Japanese auto companies sell in the United States are assembled here, although they still do include a substantial amount of foreign content.
This piece seriously misrepresents a proposal for corporate tax reform advocated by Republicans in Congress as a route to tax imports. In fact, the tax has been developed by economists who are very much conventional free traders. The purpose is to simplify the tax code and eliminate the enormous waste associated with the gaming of our current system. The treatment of imports and exports is intended to make the tax symmetric with the treatment of value-added taxes in many U.S. trading partners. It is not intended as a protectionist measure to reduce the trade deficit.
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